Business Lines of Credit
“Pull It, Pay It, Repeat It”
Business Lines of Credit (LOC): Flexible Funding When You Need It Most
A business line of credit is one of the most versatile and powerful tools in commercial finance. Think of it as a financial safety net — capital is there when you need it, and you only pay for what you use.
Unlike a term loan, which delivers a lump sum with fixed payments, a line of credit gives you access to revolving funds you can draw from as needed, repay, and reuse — much like a business credit card but with higher limits and better terms.
LOC Characteristics
| Feature | Details |
|---|---|
| Structure | Revolving credit (borrow, repay, borrow again) |
| Loan Amount | Typically $10,000 to several $Million |
| Repayment Terms | Flexible: typically interest-only. Some are structured with principal + interest during draw period |
| Interest | Variable rates; charged only on the amount used |
| Secured vs. Unsecured | Secured LOCs require collateral (e.g., receivables, inventory); unsecured are based on creditworthiness |
| Renewable | Often reviewed annually for renewal or credit limit adjustments |
Common Uses of Term Loans
Lines of credit are best for short-term, recurring, or unpredictable funding needs, including:
🧾 Cash flow gaps — covering slow receivables or delayed payments
💸 Payroll coverage — especially for seasonal staff or contract teams
🧺 Inventory purchases — restocking before peak sales periods
🧑🔧 Unexpected expenses — equipment repair, rush orders, supplier delays
📦 Vendor payments — maintain relationships with early or on-time pay
LOC: Pros and Cons
| ✔️ Pros | ❌ Cons |
|---|---|
| Flexibility — borrow only what you need, when you need it | Variable interest rates can increase over time |
| Interest is charged only on what you use | Can be revoked or reduced if financials weaken |
| Reusable — once repaid, funds become available again | May require annual financial reviews and documentation |
| Fast access — many (smaller) LOCs can fund relatively quickly | Unsecured LOCs often have lower limits than secured ones |
| Great for working capital and emergencies | Not ideal for long-term investments or major purchases |
Best Fit For:
Lines of credit are ideal for businesses with cyclical, seasonal, or uneven cash flow, including:
Retailers and wholesalers
Service providers with delayed billing cycles
Seasonal businesses (e.g., agriculture, tourism, events)
Contractors and vendors awaiting payments
Any business that needs a buffer for day-to-day swings
LOC Example Scenarios
🏬 Example Scenario 1: Retailer Preps for Holiday Surge
Situation: A home décor retailer needs to stock up on inventory ahead of the holiday rush but won’t see revenue for another 6–8 weeks.
LOC Structure: $150,000 secured line of credit with an 8.5% variable interest rate.
Use: Draws $90,000 to purchase bulk inventory at early-buyer discounts.
Repayment: Pays off the balance in full after peak-season sales.
Result: The retailer increases profit margins and stays fully stocked during the busiest months.
🧰 Example Scenario 2: Service Business Handles Late Invoices
Situation: An HVAC contractor regularly waits 30–60 days for customer payments, creating a cash crunch between jobs.
LOC Structure: $75,000 unsecured line of credit at 10.25% interest.
Use: Draws $20,000 to cover technician payroll and parts ordering while awaiting receivables.
Repayment: Replenishes the LOC once invoices clear.
Result: The contractor avoids delays, keeps crews working, and maintains good supplier relationships.
🌾 Example Scenario 3: Seasonal Farm Operations
Situation: A small farm needs upfront funds for seed, fertilizer, and equipment repairs before the planting season begins.
LOC Structure: $200,000 secured line of credit backed by crop contracts and equipment.
Use: Draws $125,000 in early spring to prep fields and secure supplies.
Repayment: Pays down the LOC after the harvest and crop sales.
Result: The farm ensures a successful season without seeking long-term debt or loans.
🛠️ Example Scenario 4: Creative Agency Smooths Out Client Payments
Situation: A digital marketing agency bills clients on net-45 terms but needs consistent cash flow to fund contractors.
LOC Structure: $100,000 unsecured line of credit at 9.75% interest.
Use: Draws ~$30,000 per month for operating expenses when receivables are delayed.
Repayment: Repays in full when client payments are received.
Result: The agency grows smoothly without taking on restrictive long-term financing.
Final Takeaway
A line of credit isn’t just a loan — it’s financial agility. It gives you the flexibility to adapt, seize opportunities, and absorb surprises without taking on long-term debt. Whether you’re filling a cash flow gap or riding out a slow quarter, an LOC is one of the smartest, most strategic tools a business can have on standby.
